Solana, downtime and derivatives

How derivatives can be used to hedge against network downtimes and make it more robust

The Solana network has been undergoing a series of upgrades to improve its performance and scalability. While many updates resulted in increased stability and throughput, others have resulted in degraded network performance of the chain, the latest being on Feb-25th 2023, the exact causes of which are still under investigation.

Network outages negatively impact many stakeholders, not least DeFi protocols. Any protocol, from derivatives to lending is potentially at risk of insolvency: settlement might not happen in a timely fashion, loans and margin trades might become undercollateralized without being liquidated, LPs can’t re-adjust their liquidity ranges, and so on.

To safeguard the Solana DeFi ecosystem, it’s imperative that protocols bake in their product safeguard mechanisms against network downtimes, though the full effects are sometimes hard to predict.

At Vyper we have been working to offer DeFi protocols, and Solana stakeholders, a way to hedge against future downtimes, so as to cover also “unknown unknowns”. We share here a first draft of our solution, welcoming feedback from the Solana community.

The proposal

Our proposal is to create a simple option that pays out a fixed amount if the Solana network has had a prolonged outage, e.g. more than N hours (TBD). Think of it like insurance against hurricanes or other catastrophic events, that you buy hoping it never pays out.

We call this derivative the Solana Killer Option (SKO)

Note that such an option has no directional risk, i.e. the payoff of the SKO does not take into account whether the SOL spot price will go up or down.

Such a product would see its natural buyer in the protocols — as they would be able to hedge against the risk of downtime of the network — whereas the sellers would be the major stakeholders of the network such as validators and the Solana Foundation. In this way, we believe that the interest of the major stakeholders of the network would be aligned with the interest of the protocols and the users of the network.

Moreover, we believe that introducing explicit financial cash flows occurring during outages would also improve the adversarial stress-testing of the network, not unlike the liveness bounties that the Foundation already runs. Adversarial buyers could buy the SKO and try to bring the network down. If they succeed, they would be able to collect the payout of the SKO. If they fail, they would lose their premium. This would be a good way to test the network and to incentivize the community to stress test the network and make it more robust.

Summary

We propose a new type of derivative that will allow the major stakeholders of the Solana network to hedge against downtimes of the network. We want to name this novel instrument the Solana Killer Option (SKO). This derivative pays out if the Solana network is down for more than a certain amount of hours, and it pays out nothing otherwise.

This new derivative can be created using Vyper, both on mainnet and on devnet. It can be used to hedge against the risk of downtime of the network, and it can also be used to incentivize the community to stress test the network and make it more robust.

Appendix

What kind of oracle do we use for settling the trade?

Having an oracle that correctly reports on network downtimes can be very challenging in itself. To overcome issues that may arise and unforeseen edge situations, we propose to use a permissioned oracle for this trade.

The oracle would be controlled by a multisig including major stakeholders of the protocol, including Foundation, Validators and DeFi protocols.

The oracle would return 1 in case of a “Network Outage Event” and 0 otherwise. The multisig committee would be in charge of properly updating the oracle as soon as the chain restarts.